LSE research into the importance of deliberation in monetary policy-making processes has contributed significantly to the Bank of England’s review on transparency practices.
What was the problem?
The United Kingdom is generally well-served by the independent conduct of monetary policy by the Bank of England. However, with the broad grant of authority possessed by the Bank of England’s Monetary Policy Committee (MPC), come important obligations to the Court of Directors of the Bank (Court), members of the House of Commons Treasury Committee (Treasury Committee), and, not least, the citizens of the United Kingdom (UK). In the aftermath of the global financial crisis, the Bank of England’s policies and practices were subjected to even greater scrutiny, not least in the realm of transparency. In its 2014 Strategic Plan, the Bank of England reaffirmed its commitment to openness and accountability and expressed its aspiration to enhance its transparency further.
What did we do?
In pursuit of the ambition to enhance its transparency, the Bank of England Governor, Mark Carney, commissioned a review by former Federal Reserve Board Governor, Kevin Warsh, of the Bank of England’s transparency practices. “Transparency and the Bank of England’s Monetary policy committee” (the Warsh Review) was published in December 2014.
It uses empirical evidence produced by Professor Cheryl Schonhardt-Bailey to resist calls for a move to the wholesale transcription and publication of all Monetary Policy Committee discussion and to advocate, instead, for the publication of transcripts only of the second day’s discussion. This policy came into effect in the Bank of England in March 2015.
Schonhardt-Bailey’s 2013 monograph, Deliberating American Monetary Policy, provided systematic analysis of the role and influence of deliberation about US monetary policy in both the Federal Open Market Committee (FOMC) and House and Senate banking committees for the period 1976 to 2008. American monetary policy is formulated by the FOMC and overseen by House and Senate congressional committees. Both the policy-making and oversight functions are processes of deliberation, or “reasoned argument”, but the effect of this deliberation has traditionally been difficult to quantify.
The work published in Deliberating American Monetary Policy, used those records to explore how deliberation among monetary policy-makers contributes to both process and outcome in the formation of monetary policy decisions. The workhighlights the importance of deliberation to monetary policy-making processes and the subsequent need to protect and maintain this process.
The review of the Bank of England’s transparency practices, the Warsh Review, was informed by the research of Schonhardt-Bailey. Having read Deliberating American Monetary Policy, Warsh invited Schonhardt-Bailey to meet with him in September 2014; the influence of the book and of that meeting is evident both in the report’s references to her work and in a personal letter of thanks sent by Warsh following that meeting.
The influence of Schonhardt-Bailey’s work is particularly evident in the report’s acknowledgement that, whilst transparency is an essential best practice for central banks around the world, it is not always and everywhere a good thing. If designed effectively and implemented successfully, transparency is a powerful tool to help the Monetary Policy Committee (MPC) achieve its objectives, but an ill-considered or ineffectively pursued regime could prove detrimental to the conduct of monetary policy and the interests of the UK economy. These considerations informed the development by Warsh of a more balanced approach to increasing MPC transparency than that demanded by the Treasury Select Committee.
Ultimately, the empirical evidence provided by Professor Schonhardt-Bailey’s textual analysis of decision-making in the FOMC and Congress helped Warsh - and the Bank of England - to resist the committee’s calls for a move to wholesale transcription and publication of all MPC discussion, as in the US model. Instead, Warsh was able to advocate publishing transcripts only of the second day’s discussion, pointing to the experience of the Federal Reserve in succumbing to wholesale transparency of its FOMC meetings as having a deleterious effect on the full and frank discussions of its members on monetary policy.
Whilst careful minutes should still be taken on day one, this means that only day two is subject to full public scrutiny – and, with it, to the associated potential constraints on policy-makers’ deliberation.
Accordingly, they recommended that the Bank of England adopt reforms in five areas including:
- Enhancing MPC minutes to better capture day one deliberation.
- Making day two transcripts public with deferral period of five to ten years.
- Publishing key inputs to the MPC policy meeting alongside day two transcripts with identical deferral period.
The Bank of England’s MPC published a response on 11 December 2014, in which it committed to:
- Publication of both the minutes or its policy meetings and (in relevant months) the Inflation Report at the same time as its policy decisions (starting August 2015).
- Publication of written transcripts of the meetings at which monetary policy is decided, and related staff policy briefing material, with an eight-year lag, as of the March 2015 policy meeting.
While day two – which is decisional and focused on explanation and advocacy of recommended policy stance – is rightly made more transparent by this, it supports the protection of day one as “safe space” for unconstrained deliberation, something strongly advocated by Schonhardt-Bailey in her research.
Alongside these measures, the Bank of England also proposed a simpler structure for its governing bodies and a clearer commitment to accountability. This package of reforms came into effect in March 2015, since which time all (second day) MPC meetings are transcribed, ready for publication after an eight-year time lag.